Generics Companies Are Major Players

AUGUST 01, 2006
Mike Faden

Fueled by acquisitions and surging demand for drugs, the top generics suppliers are starting to look less like the industry's underdogs and more like major players.

Last year, Israel's Teva Pharmaceutical Industries regained the top spot among generics makers, overtaking Novartis' Sandoz unit by acquiring Ivax. Teva now accounts for more US prescriptions than any other pharmaceutical company—branded or generic— according to IMS Health.

In revenue terms, Teva and its competitors are still small compared with the brand-pharmaceutical giants. Before buying Ivax, Teva's worldwide revenues were only about a tenth of Pfizer's, for instance. The top generics companies are growing much faster, however. The 10 largest averaged 24% growth in generic drug sales in the United States last year, according to IMS, while the top brand-pharma companies managed only a meager 1.2% average sales growth.

Growth is being driven partly by strong demand for generic pharmaceuticals. Yet, the picture is not as rosy as it might seem. Competition is intensifying, cutting deep into prices and profits.

The increased competition can be seen in the number of applications for new generics, which reached a record 766 last year. The new competitors include fast-growing companies from India that can compete at low cost. "There are more generics players than ever before," said Doug Long, vice president of industry relations at IMS Health. With this level of competition, "prices are getting lower and lower, to where [a drug] may become unprofitable."

Analysis by banking firm ABN AMRO suggests that the price wars may continue. In 2005, Ranbaxy and smaller players including Dr. Reddy's and Aurobindo together had more than 120 products in the pipeline, many of which will compete with generics already on the market. When patents expire, prices will fall dramatically and almost instantly, as multiple competitors enter the market simultaneously, according to the company's research.

The competition is a major reason for one of the industry's top trends, consolidation. Companies are seeking to cut costs by bringing all the stages of drug production in-house, including active pharmaceutical ingredient (API) manufacture. Analysts say that Teva is one example of a company that benefits from having a strong API division.

The Teva-Ivax combination created what IMS calls a "generics giant," accounting for 1 in 5 US generic prescriptions. Teva, like Novartis' Sandoz unit, is trying to "build the broadest product line possible," said Long. The company has more than 150 applications for generic drugs filed and awaiting FDA approval. Its progress has not been painless, however. Teva announced a $1-billion loss attributed largely to costs associated with acquiring Ivax.

Like other generics players, Teva also has diversified into branded drugs, which generate larger profits. Its Copaxone (glatiramer acetate injection) drug for multiple sclerosis has reached blockbuster status, generating more than $1 billion in sales. In addition, the firm has been highly successful in patent challenges, which result in an exclusivity period during which a company sells its generic at a comparatively high price.

Other generics companies also are trying to find ways to escape the price wars, Long said. One method is to concentrate on specific markets. An example is Barr Laboratories, with its focus on contraceptives such as Seasonique and Seasonale. Another method is to target hard-to-make products, a route followed by Mylan with its fentanyl transdermal patch, a generic competing with Duragesic.

Generic biologics could provide another route to profit. After long delays, the FDA recently approved Sandoz'Omnitrope (somatropin), a generic human growth hormone (HGH) and the first biogeneric to win US approval. The generics industry has long argued that there is plenty of evidence that generic versions of simpler biotech products, such as HGH and insulin, can be made safely. Biogenerics are expected to be comparatively expensive, at 70% to 80% of the branded drug's price, partly because they are more expensive to make and require more testing than small-molecule generics.

Yet overall, as the market has expanded, many generics companies have focused on growth, boosting top-line revenues while profits have languished, said Kate Kuhrt, manager of industry research at Newport Strategies. That strategy may have to change. "The low margins are not sustainable," she said.

Mr. Faden is a freelance medical writer based in Portland, Ore.